TransCanada Officially Launching Keystone's Southern Leg

CALGARY - Canadian oilsands producers have a direct pipeline link between Alberta and the U.S. Gulf Coast with the official start-up Wednesday of the Keystone XL pipeline's southern leg.

The project's opposition, meanwhile, vowed to watch the new pipeline "like a hawk" as it continues to urge President Barack Obama to reject the larger, more contentious northern leg of the system.

"This morning we have made a major change in where the largest refining hub in the world gets is oil," said Alex Pourbaix, the executive in charge of oil pipelines at TransCanada Corp. (TSX:TRP), the company that built the line.

CEO Russ Girling described the US$2.3-billion project as a "win-win-win" for U.S. Gulf refiners, who'll get access to a cheaper, more secure source of crude; for North American crude producers, who'll get a better price for their landlocked oil, and for consumers, who may pay a cheaper price at the pump as expensive foreign imports are supplanted.

The only losers, he said, are the foreign suppliers whose product will be pushed out of the lucrative Gulf market.

"We're seeing an enormous change in North American energy markets and how energy gets delivered," Girling told a news conference Wednesday.

"The Gulf Coast pipeline was designed to connect North American oil production to North American markets."

He said there's "not a chance" that crude will be exported overseas from the Gulf — at least not in his lifetime — disputing a common assertion from pipeline opponents.

In 2010, TransCanada began shipping crude to U.S. Midwest refineries on its original Keystone system, extending the line a year later to Cushing, Okla., home to an enormous oil hub that's been brimming with North American supplies. The glut at Cushing has been pushing down prices of landlocked North American crude.

The pipeline that came into service on Wednesday extends the existing line from Cushing to the Texas coast, where refiners are thirsty for Canadian crude to replace cargoes from places such as Venezuela.

Relatively meagre volumes of about 50,000 barrels per day of Canadian crude have been able to indirectly "wiggle" their way to the Gulf, Girling said. The new line means that this year, more than 10 times that amount could theoretically be shipped to the Gulf Coast market on the Keystone System.

The Gulf Coast line is starting out with a capacity of 300,000 barrels a day, and is expected to average 520,000 barrels a day in its first year of operation. It has the potential to eventually be expanded to 830,000 barrels a day.

TransCanada said the line will ship a mixture of Canadian heavy and light oil, plus some U.S. volumes, but that it's impossible to predict what the percentage will be on any given day.

The Gulf Coast line was originally pitched as part of the Keystone XL project, but the Obama administration rejected it a few years ago citing environmental concerns in Nebraska. However, the U.S. government invited TransCanada to reapply for a permit with some route changes. The company decided to break the project up into two parts, going ahead with the southern leg first, as it does not cross an international border and therefore did not need the federal go-ahead to proceed.

Girling said he expects a final environmental report from the U.S. State Department on the northern leg of Keystone XL within "weeks." That pipeline would enable some 830,000 barrels a day of crude to flow from Alberta to Nebraska, linking up with the existing system. Its current price tag is $5.4 billion, but Girling says that's going to go up in a "material" way due to delays in getting a permit.

Jane Kleeb, with the anti-pipeline advocacy group Bold Nebraska, said that Wednesday marked a "very sad day" for those worried about their land in Texas and Oklahoma.

"We all know this pipeline is a huge risk to folks along the route," she said.

"Citizens are not stopping. Citizens are watching this pipeline like a hawk. They know that they are bracing for the worst today as this pipeline starts up."

Pipeline opponents on a media conference call said they were alarmed to see crews still working on the line just days before start-up and were curious as to why some pump stations didn't appear to be running.

"I do have some major concerns on this start-up," said Julia Trigg Crawford, a Texas landowner who has been fighting TransCanada's use of eminent domain to access her property.

"It just doesn't feel like it was a well orchestrated start-up."

TransCanada spokesman Shawn Howard said the company was installing additional sensors along the pipeline at valve sites — "redundant monitoring equipment" that "further enhances our monitoring and leak detection systems."

Work on the additional sensors, which are not needed to safely operate the Gulf Coast project, should be completed shortly.

As for the pump stations, Pourbaix said the line is gradually ramping up to full capacity and some motors and pumps may not be running just yet.

He said the pipeline is using high-quality steel that's strong enough to withstand the impact of a 65-tonne excavator with nine-centimetre teeth. It's also going to be buried deep underground, reducing the chances that someone else can damage it.

"The Gulf Coast project is the safest, most advanced oil pipeline built to date in America," he said.